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FAIR VALUE

6 Months Ended

Jun. 30, 2013

NOTE 4 – FAIR VALUE

ASC 820-10, formerly SFAS No. 157, defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

Fair Value Hierarchy

ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below:

r Level 1 – Quoted prices in active markets for identical securities

r Level 2 – Other significant observable inputs (including quoted prices in active markets for similar securities)

r Level 3 – Significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)

In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to ASC 820-10.

The Company’s bond holdings in the investment securities portfolio are the only asset or liability subject to fair value measurements on a recurring basis. No assets are valued under Level 1 inputs at June 30, 2013 or December 31, 2012. The Company has assets measured by fair value measurements on a non-recurring basis during 2013. At June 30, 2013, these assets include 18 loans classified as impaired, which include nonaccrual, past due 90 days or more and still accruing, or troubled debt restructuring, and a homogeneous pool of indirect loans all considered to be impaired loans, which are valued under Level 3 inputs and three properties classified as OREO valued under Level 2 inputs.

The changes in the assets subject to fair value measurements are summarized below by Level:

	(Dollars in Thousands)
									Fair
	Level 1		Level 2			Level 3			Value
December 31, 2012
Recurring:
Investment securities available for sale (AFS)	$	-	$	100,490		$	-		$	100,490

Non-recurring:
Maryland Financial Bank stock		-		-			30			30
Impaired loans		-		-			6,084			6,084
OREO		-		478			-			478
		-		100,968			6,114			107,082

Activity:
Investment securities AFS
Purchases of investment securities		-		15,850			-			15,850
Sales, calls and maturities of investment securities		-		(11,497	)		-			(11,497	)
Amortization/accretion of premium/discount		-		(443	)		-			(443	)
Increase in market value		-		(4,208	)		-			(4,208	)

Loans
New impaired loans		-		-			342			342
Payments and other loan reductions		-		-			(219	)		(219	)
Change in total provision		-		-			300			300

OREO
OREO converted from loans		-		-			-			-
Sales of OREO		-		(150	)		-			(150	)

June 30, 2013
Recurring:
Investment securities AFS		-		100,192			-			100,192

Non-recurring:
Maryland Financial Bank stock		-		-			30			30
Impaired loans		-		-			6,507			6,507
OREO		-		328			-			328
	$	-	$	100,520		$	6,537		$	107,057

The estimated fair values of the Company’s financial instruments at June 30, 2013 and December 31, 2012 are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

	June 30, 2013				December 31, 2012
(In Thousands)	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	7,618	$	7,618	$	9,332	$	9,332
Interest-bearing deposits		62		62		6,627		6,627
Federal funds sold		312		312		2,669		2,669
Investment securities		100,192		100,192		100,490		100,490
Investments in restricted stock		1,363		1,363		1,448		1,448
Ground rents		172		172		175		175
Loans, net		254,185		256,288		249,632		251,419
Accrued interest receivable		1,446		1,446		1,450		1,450

Financial liabilities:
Deposits		329,080		299,559		332,289		314,680
Long-term borrowings		20,000		21,034		20,000		21,899
Dividends payable		274		274		-		-
Accrued interest payable		35		35		28		28

Off-balance sheet commitments		26,191		26,191		26,236		26,236

Fair values are based on quoted market prices for similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs and optionality of such instruments.

The fair value of cash and due from banks, federal funds sold, investments in restricted stocks and accrued interest receivable are equal to the carrying amounts. The fair values of investment securities are determined using market quotations. The fair value of loans receivable is estimated using discounted cash flow analysis.

The fair value of non-interest bearing deposits, interest-bearing checking, savings, and money market deposit accounts, securities sold under agreements to repurchase, and accrued interest payable are equal to the carrying amounts. The fair value of fixed-maturity time deposits is estimated using discounted cash flow analysis.

The gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2013 are as follows:

Securities available for sale:	Less than 12 months				12 months or more				Total
(Dollars in Thousands)
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Govt Agencies	$	-	$	-	$	-	$	-	$	-	$	-
State and Municipal		14,478		1,315		260		40		14,738		1,355
Corporate Trust Preferred		-		-		247		102		247		102
Mortgage Backed		31,591		1,073		850		24		32,441		1,097
	$	46,069	$	2,388	$	1,357	$	166	$	47,426	$	2,554

At June 30, 2013, the company owned one pooled trust preferred security issued by Regional Diversified Funding, Senior Notes with a Moody’s rating of Ca. The market for these securities at June 30, 2013 was not active and markets for similar securities were also not active. As a result, the Company had cash flow testing performed as of June 30, 2013 by an unrelated third party in order to measure the possible extent of other-than-temporary-impairment (“OTTI”). This testing assumed future defaults on the currently performing financial institutions of 150 basis points applied annually with a 0% recovery on both current and future defaulting financial institutions. As a result of this testing, no write-down was required in the first or second quarter of 2013.

Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary-impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain it’s investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

As of June 30, 2013, management had the ability and intent to hold the securities classified as available for sale for a period of time sufficient for a recovery of cost. On June 30, 2013, the Bank held 4 investment securities having continuous unrealized loss positions for more than 12 months. Management has determined that all unrealized losses are either due to increases in market interest rates over the yields available at the time the underlying securities were purchased, current call features that are nearing, and the effect the sub-prime market has had on all mortgage-backed securities. The Bank has no mortgage-backed securities collateralized by sub-prime mortgages. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Except as noted above, as of June 30, 2013, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated income statement.

A rollforward of the cumulative other-than-temporary credit losses recognized in earnings for all debt securities for which a portion of an other-than-temporary loss is recognized in accumulated other comprehensive loss is as follows:

	At			At
	June 30,		December 31,
	2013			2012
	(Dollars in Thousands)

Estimated credit losses, beginning of year	$	3,247		$	3,247
Credit losses - no previous OTTI recognized		-			-
Credit losses - previous OTTI recognized		-			-

Estimated credit losses, end of period	$	3,247		$	3,247

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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